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Item 1A. Risk Factors

2022-03-01 compared with 2021-11-23 · 26 added, 22 removed, 6 unchanged (89% of the section changed)

5 unchanged sentences

The occurrence of any of these known or unknown risks could have a material adverse impact on our business, financial condition, and results of operations.

The risk factor described below updates the risk factors disclosed in “Part I, Item 1A.

Risk Factors” in our Annual Report on Form 10-K for the year ended April 30, 2021, to include the potential impact of the recently announced executive order issued by the U.S.

President concerning vaccination requirements for federal contractors and employers with 100 or more employees.

The COVID-19 pandemic and related ongoing implications could negatively impact our business and results of operations.

The COVID-19 pandemic has had, and could continue to have, a negative impact on financial markets, economic conditions, and portions of our business and industry as a result of changes in consumer behaviors, retailer inventory levels, cost inflation, manufacturing and supply chain disruption, vaccination rates and effectiveness, the impact of vaccination requirements, and overall macroeconomic conditions.

While our overall business has benefited from increased at-home consumption due to COVID-19, our ability to sustain heightened sales is dependent on evolving consumer mobility and purchasing behavior.

Though the vaccination requirements and effectiveness may partially mitigate the risks around the continued spread of COVID-19, the related ongoing implications of the pandemic could negatively impact our business and results of operations in a number of ways, including, but not limited to, the following:

• a shutdown or slowdown of one or more of our manufacturing facilities due to illness or labor shortages, including any shortages related to the implementation of our recent vaccination mandate, could significantly disrupt our production capabilities, particularly with respect to our coffee production, substantially all of which takes place in New Orleans, Louisiana;

• a slowdown or stoppage in our supply chain could result from government restrictions or labor shortages due to illness or vaccination requirements, or if our suppliers, vendors, distributors, or third-party manufacturers fail to meet their obligations to us or experience disruptions in their ability to do so;

• a portion of our workforce, including our management team, could become unable to work as a result of illness or government restrictions, or the attention of our management team could be diverted if any key employees leave due to our vaccination mandate or become ill from COVID-19 and are unable to work;

• a strain on our supply chain could result from increased consumer demand at our retail and e-commerce customers;

• an increase in commodity and other input costs could result from market volatility, particularly with respect to protein meals, fats, and green coffee, the supply chain for which has been significantly disrupted by COVID-19;

• an impairment in the carrying value of goodwill, other intangible assets, or other long-lived assets, or a change in the useful life of finite-lived intangible assets could occur if there are sustained changes in consumer purchasing behaviors, government restrictions, financial results, or a deterioration of macroeconomic conditions;

• a decrease in demand for away from home establishments, resulting from government restrictions and social distancing measures, has adversely affected, and may continue to adversely affect, our away from home operations;

• an increase in working capital needs could occur, caused by an increase in days sales outstanding or an extension of payment terms by our customers or a reduction of payment terms by our suppliers resulting from increased financial pressures;

• a change in demand resulting from restrictions on social interactions could affect customers’ and consumers’ plans to purchase or methods of purchasing our products;

• a change in demand for or availability of our products could result from retailers, distributors, or carriers modifying their restocking, fulfillment, or shipping practices;

• a shift in consumer spending as a result of the economic downturn could result in consumers moving to private label or competitive products or our lower-priced products;

• a change in trade promotions and marketing activities could occur in response to changes in consumer viewing and shopping habits resulting from the cancellation of major events, travel restrictions, and changes in in-store shopping practices;

• a fluctuation in foreign currency exchange rates or interest rates could result from market uncertainties;

• an increase in the cost or the difficulty to obtain debt or equity financing, or to refinance our debt in the future, could affect our financial condition or our ability to fund operations or future investment opportunities;

• an increase in regulatory restrictions or continued market volatility could hinder our ability to implement price increases resulting from commodity or other input cost increases or to execute strategic business activities, including acquisitions and divestitures.

The risk factors described below update the risk factors disclosed in “Part I, Item 1A.

Risk Factors” in our Annual Report on Form 10-K for the year ended April 30, 2021, as updated by the Form 10-Q filed for the period ended October 31, 2021, to include information on an interim impairment analysis performed during the third quarter of 2022.

A material impairment in the carrying value of acquired goodwill or other intangible assets could negatively affect our consolidated operating results and net worth.

A significant portion of our assets is composed of goodwill and other intangible assets, the majority of which are not amortized but are reviewed for impairment at least annually on February 1, and more often if indicators of impairment exist.

At January 31, 2022, the carrying value of goodwill and other intangible assets totaled $11.7 billion, compared to total assets of $16.0 billion and total shareholders’ equity of $8.3 billion.

If the carrying value of these assets exceeds the current estimated fair value, the asset would be considered impaired, and this would result in a noncash charge to earnings, which could be material.

Events and conditions that could result in impairment include a sustained drop in the market price of our common shares, increased competition or loss of market share, obsolescence, product claims that result in a significant loss of sales or profitability over the product life, deterioration in macroeconomic conditions, or declining financial performances in comparison to projected results.

As of January 31, 2022, goodwill and indefinite-lived intangible assets totaled $6.0 billion and $2.6 billion, respectively.

The carrying values of the goodwill and indefinite-lived intangible assets were $2.4 billion and $1.1 billion, respectively, within the U.S.

Retail Pet Foods segment, and $2.1 billion and $1.2 billion, respectively, within the U.S.

Retail Coffee segment, which represent approximately 80 percent of the total goodwill and indefinite-lived intangible assets as of January 31, 2022.

Furthermore, the goodwill within the U.S.

Retail Pet Foods segment remains susceptible to future impairment charges due to the narrow difference between fair value and carrying value, which is primarily attributable to the recognition of these assets at fair value resulting from recent impairment charges in prior years.

To date, we have recognized $465.0 of impairment charges related to the goodwill and indefinite-lived intangible assets acquired as part of the Big Heart Pet Brands acquisition in 2015, primarily as a result of reductions in our long-term net sales and profitability projections.

Furthermore, we recognized an impairment charge of $150.4 related to the Rachael Ray Nutrish brand that was acquired as part of the acquisition of Ainsworth Pet Nutrition LLC in 2019, primarily driven by the re-positioning of this brand within the Pet Foods brand portfolio, which led to a decline in the current and long-term net sales expectations and the royalty rate used in the valuation analysis.

We do not believe that the Pet Foods reporting unit or any of the indefinite-lived assets within the U.S.

Retail Pet Foods segment are more likely than not impaired as of January 31, 2022.

However, further changes to the assumptions regarding the future performance of the U.S.

Retail Pet Foods segment or its brands, an adverse change to macroeconomic conditions, or a change to other assumptions could result in additional impairment losses in the future, which could be significant.

As of April 30, 2021, the estimated fair value was substantially in excess of the carrying value for the majority of the remaining reporting units and material indefinite-lived intangible assets, and in all such instances, the estimated fair value exceeded the carrying value by greater than 10 percent, with the exception of the Rachael Ray Nutrish brand within the U.S.

Retail Pet Foods segment, which was reclassified as a finite-lived intangible asset as of January 31, 2022.

For additional information, refer to Note 7:

Goodwill and Other Intangible Assets.

Furthermore, we continue to evaluate the potential impact of COVID-19 on the fair value of our goodwill and indefinite-lived intangible assets.

While we concluded there were no indicators of impairment as of January 31, 2022, any significant sustained adverse change in consumer purchasing behaviors, government restrictions, financial results, or macroeconomic conditions could result in future impairment, specifically as it relates to the Away From Home reporting unit, which has experienced a decline in demand as a result of COVID-19.

However, during 2022, our net sales for the away from home channels have continued to improve compared to the initial months of the pandemic.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors